Externalities

Externalities at British American Tobacco Plc

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Introduction

Externalities occur in the markets when there are external costs or benefits to consumers or producers of goods. This results in the actual production or consumption of the good to differ from its required consumption or production. The required consumption or production of the said good is determined by its social cost in addition to the actual cost or the social benefit in addition to the actual benefit. Resultantly, the externalities result in benefits or cost accruing to external third-parties as a direct result of the consumption or the production of the good. Externalities can also be seen as the absence of markets, due to property rights of individuals and may also involve transaction costs (Cornes and Sandler, 1996).

Externalities are both positive and negative. In the case of positive externality the market failure occurs as the good produced is less than the quantity that should be produced given its prospective social benefit. This socially optimal quantity of the good with positive externality is always greater than its market output. Likewise, a good with negative externality causes market failure as the good manufactured is more than the optimal quantity of it that is required to be produced considering the social detriment. Consequently, the socially optimal quantity of the good is always less than its actual market output produced due to its adverse effects. However, it is rightly argued that the production should be shifted to the socially optimal level only when the marginal cost of this switch is less than its marginal benefit (Arnold, 2008).

Externalities

The case of British American Tobacco Plc

The company

The British American Tobacco company is the world's second largest group producing tobacco products with its global market share in around 180 markets. It has around 200 cigarette brands in its portfolio. Furthermore, it is the leader in more than 50 markets. One-eighth of the world's total smokers smoke a cigarette which is their brand. They sold 705 billion cigarettes in the year 2011. Consequently, their cigarette sales resulted in the governments of different countries collecting more than £ 30 billion in taxes, including excise taxes. The aftertax profit of the company is about one-ninth the size of this collected tax (British American Tobacco, 2012).

They have 46 cigarette factories operating in 39 countries. Also, they employ about 55,000 people worldwide. They are also a very socially responsible firm and their corporate social responsibility includes the presence of a good environmental management system that follows superior standards of environmental protection, and aims to protect biodiversity and promote sustainable development. Finally, they aim to lobby the global legislators to enforce only a balanced legislation (British American Tobacco, 2012).

Their products and externalities

The company produces many tobacco related products. These include the foremost cigarettes, smokeless snus, cigars, roll-your-own, and pipe tobacco. All these products of tobacco only produce negative externalities to the environment. It is already known that cigarettes are the world's number one killer. The health hazards of both cigarettes and tobacco are known to ...